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Information reduction via level crossings in a credit risk model

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Abstract

This paper provides an alternative credit risk model based on information reduction where the market only observes the firm’s asset value when it crosses certain levels, interpreted as changes significant enough for the firm’s management to make a public announcement. For a class of diffusion processes we are able to provide explicit expressions for the firm’s default intensity process and its zero-coupon bond prices.

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Authors and Affiliations

  1. Johnson Graduate School of Management, Cornell University, Ithaca, NY, 14853, USA

    Robert A. Jarrow

  2. School of Operations Research and Industrial Engineering, Cornell University, Ithaca, NY, 14853, USA

    Philip Protter

  3. Department of Mathematics and Statistics, York University, Toronto, ON, Canada, M3J 1P3

    A. Deniz Sezer

Authors
  1. Robert A. Jarrow
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  2. Philip Protter
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  3. A. Deniz Sezer
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Correspondence to A. Deniz Sezer.

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Jarrow, R.A., Protter, P. & Sezer, A.D. Information reduction via level crossings in a credit risk model. Finance Stoch 11, 195–212 (2007). https://doi.org/10.1007/s00780-006-0033-1

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  • DOI: https://doi.org/10.1007/s00780-006-0033-1

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